Q1 2023 Alkaline Water Company Inc Earnings Call
Greetings and welcome to the Ark ACA wind water companies first quarter fiscal year 2023 conference call.
Time, all participants are in a listen only mode a.
A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the call over to Jeff Wright Director of Investor Relations. Thank you you may begin.
Good morning, everyone and thank you for joining us for the alkaline water companies first quarter fiscal year 2023 conference call. Shortly you will hear from Frank <unk>, Our president and CEO and David Moreno, Our Chief Financial Officer.
During the call, we will be making forward looking statements within the meaning of the safe Harbor provisions of U S security laws and we may make additional forward looking statements during the question and answer session.
Forward looking statements involve risks and uncertainties and undue reliance should not be placed on such statements.
Certain material factors or assumptions are applied in making forward looking statements and actual results may differ materially from those expressed or implied in such statements.
For additional information about factors that may cause actual results to differ materially from expectations antibody material factors or assumptions applied in making forward looking statements. Please consult the company's Form 10-Q, which was filed yesterday and its other reports filed with the SEC on Edgar and with Canadian Securities regulators on SEDAR.
In addition, such forward looking statements and any projection after the companys future performance represent managements estimates as of today August 16 2020 to.
The company does not undertake to update any forward looking statements or projections, except as required by applicable laws, including the security laws of the United States and Canada.
Actual results could differ materially from those contemplated by any forward looking statements as a result of certain factors, including but not limited to general economic and business conditions competitive factors changes in business strategy or development plans ability to attract or retain qualified professionals as well as changes in legal and regulatory requirements.
The company issued a press release announcing its financial results and filed our Form 10-Q with the SEC.
So participants on this call who may not have already done so may wish to look at those documents as the company will provide a summary of the results discussed on today's call.
In a moment I will turn the call over to our CEO , Frank Lazar, who will give you an overview of the company's first quarter highlights.
Falling Frank's comments, David Guarino, our CFO will provide an overview of the company's financial results.
Frank will follow David again, providing closing remarks.
They will then be joined in the Q&A portion of our call by our Chief Marketing Officer, Tom Hutchison and Frank Chestman, Our executive director of sales and operations.
The call is yours. Thank you, Jeff Hello, everyone and welcome to the alkaline water companies first quarter fiscal 2023 conference call.
Every first quarter in company history, we've been able to say that we are coming off of our best year ever today's call is no exception.
We're pleased to announce that the momentum from last year has continued through the first quarter of fiscal year 2023, and we have delivered another record sales quarter, our topline revenue for our first quarter of fiscal 2023 was approximately $16 9 million.
<unk>.
This represents year over year growth of nearly 20%.
This growth rate right out of the gate in the first quarter establishes a great pace towards achieving our fiscal year revenue guidance. These record sales enable us to pivot toward reducing expenses and enhancing margin, while still maintaining a keen focus.
On sales.
Prior to my arrival as CEO there.
Company had already begun to throttle down some G&A expenses to start the new fiscal year. However in the last month of Q1, we began our new pathway to profitability review and evaluation.
During that review, we froze all non essential spending on the G&A side of the business.
As a result of this approach there was a year over year G&A improvement of over 42% in the first quarter of fiscal 2023.
Due to the timing of our full review and the implementation schedule for the rollout of our new cost saving measures and margin enhancements. We did not anticipate seeing many of the benefits of enhanced gross margin in the first quarter.
Building gross margin, while not negatively impacting sales.
Requires a very measured approach and as we carefully navigate this we anticipate seeing gross margin improved more in future quarters.
Last week, we announced that we finished our thorough and extensive review of our entire operation.
And we project up to $15 million in annual cost savings and margin enhancements compared to last year.
Once these changes are fully implemented.
Rest assured well we have completed this extensive review to now focus on the execution of our pathway to profitability initiatives.
As additional opportunities arise, we will continue to take full advantage of them.
<unk> growth higher sales volume and future partnerships, Ken all lead to more opportunities that benefit both the top and bottom lines of the business.
We will continue to implement changes to reduce G&A spending and we will also begin to see improvement on the operation statement and sales and marketing expense, while still investing appropriately in advertising to promote the alkaline 88 brand.
And perhaps most importantly, as I just mentioned our gross margin will start to climb again as we initiate various changes with our production processes and partners to begin reducing cost of goods throughout the rest of fiscal year 2023 and beyond.
And we know that increasing gross margin is essential to the operational future of alkali and 88.
Even as we reduced our operating expenses by almost 20% year over year in Q1.
We also experienced the highest fuel cost in our history, adding to rising inflationary pressures.
Spike company fore sight to mitigate these external forces as early as last year the cost increases associated with the raw materials, we use in our production and increase in shipping and handling clearly outpaced any changes we made earlier this calendar year <unk>.
Words as paper plastic and gas prices all surged dramatically, we were unable to respond quickly or extensively enough to maintain a healthier gross margin.
Now after the results of our company wide review, we are moving swiftly to enact the necessary changes to generate annual margin improvements of up to $7 million compared to last fiscal year.
As we shared last week in a press release these.
These measures include packaging changes improved manufacturing efficiencies pricing and promotional optimization and.
And production network enhancements to decrease shipping and handling costs.
Let me reiterate it is our plan to improve profit while continuing to drive sales as evidenced by record July sales exceeding last year by nearly 30%.
Our packaging changes, which we are working to enact as quickly as possible, we will use more cost efficient materials and less of it allowing us to save money on most of the cases, we ship.
Over the course of the year that savings realized across.
Millions and millions of cases for example, we are looking at things as simple as using brown boxes, instead of white to save money on every gallon we ship.
An added benefit is that these boxes are more eco friendly than our current packaging.
We're also going to remove cardboard tray from some of our single serve cases and rely on a stronger ramp reducing materials used and cutting cost per case.
As our production partners grow and optimize their processes, we are able to take advantage of their improved manufacturing capabilities. For example, as we and our partners have grown some of our co Packers can now blow bottles within their own plans.
Saving us precious sense on every single one.
As these operating efficiencies scale, we will see the cost benefits multiplied across tens of millions of bottles every year.
Pricing optimization is also important.
But we want to assure listeners.
Is not going to be the primary means by which we will protect our margin.
That being said everyone knows that our costs are up and in the future. We will be more proactive about staying ahead of increased cost in our production process as well as better maintaining pace with category price movements.
Promotional op compensation means that in contrast to our previous strategy and that of many other CPG companies, which was growth at all cost we will be very strategic in the use of promotional dollars.
Finally, we will see a decrease in shipping and handling costs for two reasons first we have a strong distribution network with great co packing partners and raw material manufacturers around the country.
As a few years ago, we may have been shipping raw materials across the country to our co Packers.
We now have a much more strategic geographic network of manufacturers.
Sometimes cutting out thousands of miles on the road.
Since the beginning of the first quarter alone. We've added three new raw material providers to become a more efficient company are strategically distributed manufacturing network literally cut costs in half on some of our production steps compared to previous years.
The second reason, we expect to see better margins on shipping and handling is simply the fact that fuel costs associated with each of these miles are beginning to normalize and we will be seeing the benefits of that in the future.
In addition to helping improve our gross margin. The same production network, we will continue to reduce freight costs lessening sales expenses.
Again in years past, our co Packers might've been 2000 miles away from a new client.
But in order to continue to grow our top line at all costs, we ship regardless of distance now of course, we still do what it takes to expand our brand into new clients.
But we now have co packing plants within a few hundred miles of most of our clients key distribution centers around the country.
This is a game changer, allowing us to continue to grow while improving the bottom line.
We also are working diligently on the logistics of reducing the number of less than full truckloads that are delivering alkaline AE.
So as you can see improving gross margin is not just about adjusting price. It is about dissecting each and every cost component of goods sold.
And making changes.
That are transparent to our retail customers.
We announced <unk>.
<unk> in Q1. The addition of century Springs.
<unk> 80, Eight's first co packer in the Midwest.
This is a huge advantage for us as we work to gain market share in that region, and we expect them to be at full capacity soon.
Just yesterday, we began production and denman in Northern California, which will offer a huge support for our brand expansion on the west Coast and Pacific Northwest.
Management is working closely with Department heads and our project management office to track the implementation of all these initiatives and more.
Shareholders should begin to see the resulting benefits to our gross margin in Q2 and increasingly in Q3 Q4 and beyond.
Amidst all of the work we are going we are doing to become more cost efficient company or for our shareholders.
We will continue to drive sales growth.
To highlight that point.
As I stated earlier, but it bears repeating our record revenue in Q1 has been followed up by our best July in company history with revenue up approximately 30%.
This top line growth is driven by the same factors that we've mentioned time and time again, new clients SKU expansion in existing clients and organic growth.
Since April one we have added over 8400, new client locations in the U S, including many great regional retailers like progress subsidiary Brown <unk> in the Midwest.
1000, new convenience stores more than 700 Army and Air Force Exchange service locations and 6000 stores.
National discount giant dollar tree.
While that's great progress so early in fiscal 2023, our target door a list for the rest of the fiscal year has more than 30000 locations on it.
Our sales team is hard at work to close some of those opportunities and felt alkaline <unk> 88 on more shelves and grocers convenience stores Big box club and specialty retailers across the country.
And as these additional stores come online we will continue to keep you informed of our progress.
Our C store growth is supported by our strong network of strategic DSD partners, including our most recent addition, Heidelberg in Ohio and Northern Kentucky.
There are over 140000 since C stores in the United States and alkaline 88 is still only in a fraction of that.
This channel represents one of our greatest opportunities for continued market share growth.
In April we announced that we have surpassed our forecast for our first year of DSD partnerships and since then we've continued to add new stores, including most recently approximately 600.
Pms on the West Coast.
In the same timeframe, we expanded our skus and over 14000 existing clients.
<unk> has taken our one liter 12 pack into approximately 8000 of their stores from coast to coast. Additionally, we recently announced that Rite aid has added the alkaline 88, two leader to over 2300 stores.
With great National chains, like Cvs Rite aid Walmart and dollar tree.
You are listening to this call and the United States. There is a very good chance you can find multiple alkaline 88 products within just a few miles of your front door.
We're also very pleased with the rollout of our first ever gallon club pack launched in Sam's club in the first quarter.
Our one gallon four pack has seen sales grow steadily since being introduced.
It's a perfect product for the warehouse club format, and we are exploring ways to continue to capitalize on the club channel with new clients and innovative packaging as this channel is already proving to be a significant contributor to sales.
As our retail footprint continues to grow across all channels.
We will be able to support that growth in ways that help both our top and bottom lines. Thanks to the cost savings and margin enhancements measures that we're taking.
Yeah.
As we mentioned on our last call the beverage industry will continue to grow but we will experience a slowdown in that growth over this next season.
Despite that we are confidently optimistic and alkaline 80 eights future as one of the fastest growing beverage category in the country value added water.
According to Nielsen data for the 13 weeks ending July 16, 2022 for all outlets combined excluding convenience alkaline 88 year over year dollar growth is more than three times that of the overall category.
Additionally, it was one of three top 10 brands that had positive year over year unit growth for the same periods.
Furthermore, alkaline 88 continues to be a leader in the natural grocery channel.
We announced in June that alkaline 88 was the number one best selling brand at the K E holiday show, which took place that month.
We expect.
To continue to outpace the overall value added water categories growth throughout fiscal 2023.
Thanks to the strength of our brand and drivers that I've already shared with you on this call.
We expect to do it all more cost effectively as we continue to rollout our company wide initiatives that enhance shareholder value by finding the perfect balance between cutting costs and driving top line sales in this challenging economic climate.
I'd now like to turn the call over to David for our overview of our financial results for the first quarter David.
Frank before I begin I'd like to encourage interested listeners to review the Form 10-Q that we filed with the SEC for a more detailed explanation on some of the quarterly results I will be highlighting today.
For the three months ended June 32022, we reported our best quarterly revenue ever of approximately $16 9 million comparatively.
Approximately $14 1 million for the three months ended June 32021. This represents a 20% increase in sales.
Our gross profit for the quarter ended June 32022 was approximately $3 5 million comparatively.
Comparatively approximately $4 8 million.
For the quarter ended June 32021, the decrease in our gross margin was attributed to an increase in raw materials and shipping costs.
As we've already highlighted on this call we have proactively implemented a company wide changes to improve our gross margins going forward.
Total operating.
<unk> expenses for the three months ended June 32022 were approximately $9 $8 million.
Compared to approximately $12 1 million in the same quarter in the prior year.
Total operating expenses decreased primarily due to a halt and nonessential general and administrative expenses, where we saw a 42% decrease year over year.
Total operating loss for the quarter ended June 32022 was approximately $6 3 million or approximately $1 $1 million improvement compared to the same quarter in the prior year.
Our net loss per share in the quarter ended June 32022 was <unk> <unk> per share.
A <unk> <unk> improvement over the eight loss per share in the quarter ended June 32021.
Our cash position at the end of the quarter was approximately $3 million.
With our cash on hand, plus the implementation of our cost reduction strategy anticipated warrant exercises our line of credit and the sales agreement with Roth capital partners as disclosed in our 10-Q. It is our plan to fund our current operations and capital needs. However, if our plans change.
Or are accelerated or we chose to increase our production.
Capacity, we may seek to sell additional equity debt securities or obtain additional credit facilities, including seeking investments from strategic investments.
And with that I'd like to turn it back to Frank. Thank you. Thank you David.
Before handing the call over to the operator for our Q&A I would like to take a moment to thank our shareholders production and distribution partners clients and of course, our fantastic alkaline 88 employees.
We have undergone a rigorous process. These past two months as we put everything we have into ensuring that the alkaline water company is in a position for continued success, regardless of what the economic headwinds come our way.
Everyone at this company from the warehouse to the boardroom.
Is aligned with shareholder interest because equity is an important part of how we attract and reward talented hard working team members.
I think it is worthy sharing with everyone on this call that I myself since day, one in my role as CEO insisted on taking a substantial portion of my compensation in shares and options because I like the rest of the alkaline 88 employees believe in.
This company.
We all know that change is tough, but the alkaline <unk> team has been wonderful in adapting and rallying to the cause as we all collectively work toward not only remaining one of the nation's top enhanced water brands, but also becoming a profitable one at that.
Thank you operator.
Please.
Thank you we will now be conducting a question and answer session.
Like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue for.
For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Please while we poll for your questions.
Our first questions come from the line of Sean Mcgowan with Roth Capital Partners. Please proceed with your questions.
Yeah.
Thanks, guys I appreciate it.
I have a couple of questions.
David could you help us kind of get an order of magnitude color on the impact on gross margin raw material versus shipping any other factors in there.
As the most most impactful to gross margin.
The most impactful to gross margin is from.
From raw materials to shipping would be raw materials and the key raw material is.
The price of resin neuroplastic.
Okay.
Okay.
To the extent that we're seeing gas prices coming down we'll see some.
Alleviation of the pressure on shipping, but is there anything in your crystal ball.
We are resolute zone.
Well I mean, because resin is also.
Tied to oil.
He is slowly coming down as well so we're.
Certainly not seeing the increases where we saw over the past 12 months and some of the forward looking projections, we get from our supplier absolutely shows us coming down a wee bit.
Okay. Thank you.
And then Frank if I look at.
I appreciate that color on where July came out if I look at your full year guidance kind of implies a slowdown from that certainly and even from the first quarter. So what are you seeing that's making you think that sales through the balance of the year it could be less than what we saw in the first quarter year over year.
I'm sorry, the first quarter the year over year was 20% up July was up 30%.
Right.
But the guidance would imply less than that increased Oh I'm sorry.
Yes, I am.
I'm sorry, right now.
We position the original guidance at the $70 million, which at the time as we indicated on the call. We felt was very prudent in terms of guidance. We have seen in the first quarter being strong July being very strong. So at this point in time, while we are maintaining our guidance, we'll keep an eye on it.
And if our sales trend continues.
We could be in the position to review our guidance to the street.
Okay. So youre not really trying to make a large statement that it's not going to be better than that just just one quarter in so.
You create back.
Okay and then my last question is.
This is long term assuming that you get growth.
Over the next several years and reach your cost savings and margin enhancement goals, where this is long term again, where do you think gross margins could go as you kind of a natural ceiling on how high they could get.
I don't believe it's a natural ceiling I believe that.
As we continue to evaluate every piece of the business and again I want to emphasize why we will look at strategic price changes and promotional spend we also will be a lot more.
I would guess to say efficient on how we do it so I think that from pricing. We do have an opportunity that we will be able to pick up margin there, but I think.
Equally as important is that whole raw material situation.
I can tell you as I look forward the majority of our anticipated growth is not driving from pricing or promotion, it's driven from renegotiating our raw material.
As David mentioned, we're currently looking at all of that but as the resin went up we as an organization did not react as quickly as we should have that tie in sight.
But what we have done now is we certainly gone to each of our suppliers and we've discussed where we believe we need to be on our cost state.
And the fact that we now have facilities that blow their own bottles.
And we've got more facilities that will come online to do that we believe that that also will increase our.
Gross margin. So I would tell you I am confident that I don't foresee a ceiling on gross margin.
How we go after getting the gross margin is going to be the key to keeping our topline growing which is our priority, but also to push the gross margin. So I think that will have.
More clarity after Q2 on how we are seeing the margin grow as I mentioned on the previous call.
We're also tracking that with our PMO office.
We have.
Meetings every two weeks just track and making sure everybody's in line, but weekly updates on that so I think that the key thing for us internally because we've become a lot more disciplined I would I would tell you that we are actually we have actually built.
Bridge on how we see the margin going out and I'm not prepared to share the <unk> build at this point, but I would tell you we see a nice trend on a build and again I would tell you we see us moving gross margin not by just raising prices, but by getting the.
Supply chain right and just simple things like boxes. When you look at the savings potentially we have is something as simple as going from a white box type Brown box aside from the eco benefit of that it has significant opportunities for us. So I think that we've evaluated every single piece of this and I have to tell you.
The organization is sure had a lot of patients with me because I have a tendency to poke and probe and <unk>.
Never say no.
Bottom line. There is I think we're just continue to do that so long winded response, but I'm really excited about what we're doing here in the company I am excited by every area that we're doing and again I will emphasize we are doing everything we can to move margin without hurting top line sales.
Okay. Thank you.
Thank you I appreciate you for question.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Okay.
Thank you there are no further questions at this time I would now like to turn the call back over to Frank <unk> for any closing comments.
Thank you in closing I would like to thank everyone for dialing in today.
These are very exciting times for all of US here at alkaline 88, as we transform our company to not only being sales driven but also pivoting to a true pathway to profitability, which we highlighted today.
During the first quarter, while we were only 30 days into our exhaustive review of company operations, we were able to show positive results in our G&A expenses now.
Now that our extensive pathway to profitability review is complete we have begun the task of implementing the many initiatives we have outlined and are tracking them all through our project management office.
We have developed a bridge to bill to each component necessary to drive gross margin without having a negative impact on sales, we anticipate seeing a steady build on margin rate beginning in Q2 and beyond.
As we previously stated we will continue to keep you informed of our progress along the way.
Once again, thank you for joining us today and for your continued support and interest in the alkaline water company. Thank you and have a great day.
This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.